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Sunday, October 24, 2010

The History of MLM

A Brief History of MLM

Nobody knows exactly when MLM began, because it really evolved over a number of years, prior to World War II. Most observers agree that Nutrilite – now an Amway subsidiary – was the first true MLM company. In addition to being the founders of network marketing, they were the founders of the vitamin and food supplements industry, way back in the 1920s. So the historical connection between MLM and nutritional products dates back over most of the twentieth century – a fact unknown to most people (especially those who think that, somehow, MLM companies are johnny-come-latelies to nutrition. Most of the major product breakthroughs in that industry have been pioneered by MLM companies, in fact.)

The beginnings of MLM

In 1949, two young men named Rich DeVos and Jay VanAndel became Nutrilite distributors. In the ensuing decade, they build a large, prosperous organisation across America. But, in the late 1950s, a problem arose that was to continue to plague many MLM companies even until now. And it almost sank their business.

The manufacturing arm of Nutrilite was owned separately from the marketing arm. And, as often happens in such circumstances (not just in MLM), the marketing arm was seen to be making most of the money. There’s nothing unusual in this. It’s a fact of life that those who connect manufacturers to their markets take the lion’s share of the selling price, in any industry.

To make a long story short, a standoff developed between the manufacturer and the marketer. DeVos and VanAndel watched, alarmed, as their distribution network dwindled rapidly due to lack of product and the resulting lack of income from sales. Unable to bring the two parties to an agreement, they decided to create a product of their own that they could supply to what was left of their network.

Amway is born

What happened next is legendary. In 1959, they formed Amway Corporation. Within ten years, they’d bought Nutrilite, and Amway has rarely looked back ever since. It’s still the largest MLM company worldwide.

Of course, that kind of spectacular success soon attracts attention and, before long a rash of MLM companies sprang into existence. But there was also a dark side to the story – one that still causes problems to this day.

It didn't take sharp operators long to realise that they couldn't take advantage of people under the strict, ethical rules of conduct required by the MLM companies. So they came up with a counterfeit version, based on a scam from the late 1920s (The Ponzi Scheme) that looked like MLM, but allowed them to fleece people who were basically the same as themselves… lazy and greedy.

Thus was born the Pyramid Selling Scheme.

The counterfeits soon emerge

It’s ironic that people still mistakenly accuse MLM of being pyramid selling when it was actually the reputable MLM companies that first petitioned government authorities to have pyramid selling outlawed.

It didn’t take long for legislation to be passed to rub out pyramid selling. But pyramid selling isn’t really a system or structure, despite its cunning name. It’s a mentality – an attitude – which is very hard to legislate against. Consequently, many anti-pyramid laws also discriminate unintentionally against legitimate network marketing, “throwing the baby out with the bathwater.”

Over the following decades, MLM has evolved and developed further into the wide array of companies, product ranges, reward plans and cultures that exist today. This unique, powerful system of free enterprise continues to grow, attracting more and more people to it. As we prepare to enter the twenty-first century, MLM has never been so well-respected, so healthy, so attractive or so rewarding.

The Dawn of a New Age in Network Marketing

The term “network marketing” specifically is 20th century creation. Its genesis lies in the post World War era of the late 40s and early 50s. This was the dawning of the era of the subdivision in which genuine neighborhoods flourished with their own circle of trusting relationships and backyard barbeques.

It is out of this trend that the term “belly to belly” marketing – or warm market as you may better recognize it – was coined. A company named California Vitamins came to the realization that many of their new sales recruits were in fact friends and family of their existing sales force. These new recruits’ primary motivation to becoming a sales associate was that they wanted the products for themselves at the wholesale cost.

That led the company to recognize it was easier to build a sales force with a lot of people who sell a small amount of product, than it was to find a small number of top sellers who would move mountains of product.�

The Advent of MLM Multi-Level Marketing

And so California Vitamins designed a revolutionary sales compensation model encouraging their salespeople to invite new representatives from satisfied customers, most of whom were family and friends. Each of those new representatives in turn had the same right to offer the product and opportunity to become a representative to others.

This allowed the sales force to grow exponentially. The company rewarded its representatives for the sales produced by their entire group – or network – of sales representatives. And so multi-level marketing was born.

It was also during this time that the home party plan was introduced. The original party plan was the Stanley Hostess Party Plan, by Stanley Home Products. The focus of the party plan was to demonstrate the myriad of uses and benefits of the products right in the home. Out of the original Stanley dealer roster came the founders of such future marketing program giants as Mary Kay and Tupperware.

The introduction of the multi-level, person-to-person sales program in the mid 1950s coincided with another pair of new giants arriving on the scene. First, Shaklee was launched. Then, a couple of years later, in 1959, came the birth of Amway.

The term multi-level marketing, or MLM, became a part of the industry lexicon. And the direct selling industry would never be the same.

The Myth of the MLM Pyramid

The common notion that MLM companies are all pyramids really gained steam in the mid 1970s when the US Federal Trade Commission (FTC) charged that Amway and its multi-level marketing structure constituted an illegal pyramid.

This made lots of headlines in the mainstream press.

In fact, in 1979 the court sided with Amway and deemed its multi-level marketing structure valid and legal and that its model represented a legitimate business opportunity.

Out of that court decision, the “Amway Safeguard Rule” set the legal standard for direct selling, multi-level, and network marketing based companies going forward.

However, the myth of all MLMs being pyramids lives on.

Amway with its multi-level structure was targeted by the FTC partly in response to a proliferation of pyramid programs in the 1970s. In these illegal pyramids, money was the only commodity or “value” that moved through the program. There was no underlying product or service.

Schemes were developed whose only purpose was specifically to recruit others into the program. It was the emergence of several high profile schemes that led to a rash of regulatory requirements and the ultimate targeting of MLM as a structure. It also led to the clarification of speculative or fraudulent schemes and legitimate direct sales activities.

The Amway Safeguard Rule identifies three key points which ensure the validity of the opportunity. It was the existence of these three points as part of the Amway structure that led the court to conclude the business was not an illegal pyramid.

These therefore are important criteria with which to assess any network marketing or MLM opportunity and establish whether it is in fact legal as opposed to “one of those pyramid scams”.

Does the opportunity require the retail sale of products or services before one can qualify for any recruiting commissions or sales?

Does the opportunity have a mechanism in place to prevent the stockpiling of inventory of Physical products with no intention of reselling?

Does the opportunity offer representatives who choose to leave a buy-back provision on unsold, unopened inventory or products?

Network marketing gains legitimacy

The term “network marketing” became popular in the 1980s. It was partly coined as a way of getting away from the stigma of MLM.

Ultimately, direct sales and multi-level marketing are distinct subsets within the overall network marketing industry. In simplistic terms, they can be defined this way:

Direct selling is where the profit or commission for a retail sale is paid to one person.

Multi-level marketing is where the profit or commission for a retail sale is shared with an up-line (or recruiter). Typically there are also bonuses paid based on recruiting activity, so long as the recruiting is accompanied with ongoing retail sales activity.

Finally, network marketing gained a strong degree of legitimacy in the 1990s and into the 21st century. A number of very well known and respected authors and business people began to lend their public endorsement to the industry. People such as Brian Tracy, Robert Kiyosaki, Paul Zane Pilzer, Jim Rohn, Donald Trump and even Warren Buffet began to openly talk about the merits of the industry and, in fact, encouraged people to consider it.

Corporate Advantages of a Network Marketing MLM Structure

At the same time, network marketing has morphed into a proven, preferred method of product distribution by some of the largest companies on the planet.

Corporations came to the conclusion that network marketing, as a distribution channel, offered many advantages, not the least of which is that it’s lower cost.

Commissions are only paid on the sale of product or services and the structure allows the companies to offload much of the time and Training requirements onto its representatives, who are incented to train the new representative they recruit.

Pretty soon telecommunications companies, travel companies, satellite providers, financial services companies, and many other industries joined the party. Today there are literally thousands upon thousands of network marketing based companies operating throughout the world.

Modern Day Network Marketing

Today, network marketing is a +$100 billion dollar industry.

So there you have it, we’ve come full circle. By reading this far you now know more about the network marketing industry than at least 97% of the population.

Now that you have this grounding in the history of the MLM network marketing industry, let me ask you a question:

Do you still feel as though there is a reason to feel ashamed or embarrassed to admit you are involved in or considering getting involved in network marketing?